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DISPOSITIONS OF LIHTC PROPERTIES (OR LP INTERESTS THEREIN) WITHOUT RECAPTURE BONDS. Allen A. Lynch, II Partner Nixon Peabody LLP 100 Summer Street  Boston, MA 02110  Office.:   +1 617-345-1235 Mobile:  +1 617-922-0212 [email protected] Dispositions without Sec. 42 Bonds.

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DISPOSITIONS OF LIHTC PROPERTIES (OR LP INTERESTS THEREIN) WITHOUT RECAPTURE BONDS

Allen A. Lynch, IIPartner

Nixon Peabody LLP100 Summer Street Boston, MA 02110 Office.:   +1 617-345-1235Mobile:  +1 [email protected]

11215938.1


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Dispositions without Sec. 42 Bonds

  • LPs are now exposed to recapture for a longer period of time for non-compliance

  • Key questions:

    • What is the risk of recapture?

    • Who will pay if the credits are recaptured due to

      pre-transfer, or post-transfer, non-compliance?

    • For what period of time will LPs need to be protected?

  • LPs must look back, and look forward, to address these questions



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Looking Back: Pre-Transfer Non-Compliance DD

  • Re pre-transfer non-compliance risk, LPs should:

    • Calculate potential recapture exposure

    • Investigate and understand the compliance status of the property prior to, and at the time of, transfer

    • Evaluate adequacy of existing GP guaranty, and the guarantor, in light of the project’s compliance history and present status


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LP Protections for Pre-Transfer Non-Compliance

  • Check PA and existing GP guaranty

  • “Upgrade” guaranty if appropriate

  • Consider re-affirmation from GP that its guaranty will survive transfer, and dissolution (if fee sale)


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Looking Forward: Post-TransferNon-Compliance DD

  • Re post-transfer Non-compliance, LPs should:

    • Calculate potential recapture exposure

    • Understand state agency compliance practices

    • Put more emphasis on compliance experience/reputation in selecting buyers

      • Who will manage the project?

    • Do what the surety bond underwriter did

      • Underwrite the credit worthiness of guarantor, applying a net worth test (typically 3x recapture exposure, 10% of which must be cash/cash equivalents or marketable securities)


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LP Protections for Post-Transfer Non-Compliance

  • Compliance/Indemnity Agreement (“CA”)

    • Comply

    • Copy

    • Continuity

    • Cover

  • Guaranty

    • Performance of Buyer under the CA

    • Payment under the CA

    • Net Worth covenant

  • Notice of CA

    • Recorded to put subsequent buyers on notice

  • Some sureties are selling “optional” recapture bonds


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How does the new SOL affect LPs?

  • “3 years after the Secretary of the Treasury is notified of non compliance” (by the taxpayer!)

    • Places LPs at risk of recapture until …?

    • Means the indemnity in the CA, and thus the Guaranty, have to stay in effect until …?


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Canceling Existing Recapture Bonds

  • If entire premium paid in advance, most surety contracts do not provide for a refund

  • For bonds with annual premiums, not paying future premiums sounds nice, but where does that leave an LP in terms of recourse?

  • IRS Rev. Proc. 2008-60 (10/2/08) – how to make election to cancel recapture bond

    • Signer of the 8693 sends letter to IRS:

      • taxpayer name, address, TIN

      • statement that taxpayer reasonably expects compliance

      • declaration that foregoing is made under penalty of perjury

      • Copy of Form 8693


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Allen A. Lynch, IIPartner

Nixon Peabody LLP100 Summer Street Boston, MA 02110 Office.:   +1 617-345-1235Mobile:  +1 [email protected]


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